You see the stock market rising. Your co-workers are growing their retirement nest eggs by stashing their dollars in Independent Retirement Accounts (IRAs) and 401(k) plans. And your neighbor is exploring real estate crowdfunding.
It seems like everyone is investing in something except for you. Your excuse? You point to your income, which you feel is too low to allow you to invest in anything, whether it’s stocks, bonds or mutual funds.
But here’s the truth – even if your income is low, you can still afford to invest. Financial experts say setting aside even a little bit of money each month – as little as $50 – can make a big difference when it’s time for your retirement years.
Learn how to save
Vic Patel, founder of Forex Training Group in the New York City area, said that before they can learn to invest, low-income consumers must first learn how to save. This means creating a household budget listing all of your monthly expenses – including what you spend on optional purchases such as going to the movies and eating out – and the income you earn each month.
Once you’ve created that budget, you can look for expenses that you can lower. Maybe you can downgrade to a lower-tier cable package. Maybe you can reduce the number of times you eat out or hit the movie theater. You can then take these savings and invest them in stocks, bonds or other vehicles.
“The only way that you can start saving is by understanding where you are spending your money and curb the waste as much as possible,” Patel said. “And, yes, regardless of income level, there is somewhere in your budget where you can curb expenses.”
Patel said that low-income investors can start by investing the savings they’ve wrung from their budgets in an index fund – a type of mutual fund containing a balanced mix of stocks, bonds and cash. You can find these funds through companies such as Fidelity and Vanguard.
“Then you have to sit and be patient,” Patel said. “There is nothing better for growing an account than the natural effects of compounding returns over time.”
“I think the key is not to be overwhelmed by what you read about retirement,” said Eric Bowlin, an investor who runs his own self-titled financial blog. “Retirement planning is about using investments to replace your lost wages when you stop working. If you don’t earn a lot now, you don’t need a large retirement account to replace that income.”
Bowlin, like other financial experts, recommends that people with low incomes start small. He says that investing $25 a week in an investment savings vehicle such as an IRA over 40 years will come out to about $350,000, assuming an average return on your investment dollars of 8%.This could be enough to replace half or more of your income during retirement if you make a lower income, Bowlin said. You’ll also be able to rely on Social Security income to help you meet your daily living expenses, he added.
A helpful tax credit
Scott Stratton, president of Dallas-based Good Life Wealth Management, said that people who earn low incomes can benefit from the Tax Credit for Qualified Retirement Contributions, better known as the Saver’s Tax Credit.
Individuals and families who meet the income requirements will receive a tax credit of 50 percent, 20 percent or 10 percent of up to $2,000 worth of any retirement plan or IRA contributions they make during a year. Those taxpayers who are married and filing jointly will receive this credit on up to $4,000 worth of contributions.
The tax credit is a great incentive to encourage low-income individuals to invest. Say you as an individual invest $2,000 into a retirement account. Depending on your income level, you’ll get a tax credit of $200, $400 or $1,000.
“That’s like having Uncle Sam pay for up to half of your investment,” Stratton said.
The income requirements of the Saver’s Credit do change. According to the IRS, to qualify for the 2016 Saver’s Credit, individuals must have an adjusted gross income of no more than $18,500 a year, while taxpayers married and filing jointly must have a combined adjusted gross income of no more than $37,000 a year. Those are the income levels at which taxpayers qualify for the Saver’s Credit of 50 percent. Those with higher levels, can still qualify for the 20 percent and 10 percent credits.
Take advantage of 401(k) plans
For Scott Smith, founder of Rochester Hills, Michigan-based financial planning company Olympia Ridge, there is no better investment vehicle than a 401(k) plan.
If your employer does offer such a plan – not all do, of course – you should invest at least as much as you can to earn your company’s 401(k) matching contribution, Smith said. In a matching contribution, your employer will at the end of the year contribute a pre-set amount of money to your 401(k) plan if you meet certain contribution limits. How much your employer contributes will vary according to your plan’s guidelines. This matching contribution, though, is free money that you can apply toward your future retirement.
Smith says that if your employer does offer a 401(k) plan, it’s important to start investing in that before you branch out to any other type of investment vehicle. Investing in a 401(k) plan is easy. Once you sign up, your employer will automatically deduct your investment from each paycheck.
The Acorn app might help
Technology can help you invest even if your income is low. Robert Johnson, chief executive officer of the American College of Financial Services in Bryn Mawr, Pennsylvania, points to the Acorn app as an example.
You can tie your credit and debit cards to this app. Then, if you buy, say, a coffee and doughnut in the morning and the total bill comes out to $3.13, the debit card that you used will be charged $4. The extra 87 cents will go into an investment account that you set up through the app.
That extra money is invested in a variety of Exchange Traded Funds, better known as ETFs. The app contributes to specific ETFs depending on the risk tolerance that you specify after downloading Acorn.
“There are many technological solutions that actually tie investing to consuming activities,” Johnson said.
Learn more about getting started with Zing’s Investing 101.
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